The president’s broken window fallacy: Carbon policies and jobs

It is time to expose the flawed jobs reasoning behind President Obama’s new carbon plan.

In my earlier essay discussing President Obama’s speech on climate change and “carbon pollution,” I noted the weakness of the evidence on the effects of increasing atmospheric concentrations of greenhouse gases (GHG) and the poor predictive performance of climate models. I also noted the trivial prospective temperature effects of even draconian anti-carbon policies regardless of what one believes about the underlying climate science, and the obvious implication that wealth redistribution, essentially from red states to blue, is the real underlying goal motivating these policy proposals.

I turn now to some of the poor economic analysis in the speech, in particular the jobs promised as an ancillary benefit of costlier electricity, specifically in the form of complementary employment growth in the wind and solar power sectors. As Mr. Obama claimed: “And that means jobs… manufacturing the wind turbines [and] installing the solar panels…”

At a general level, employment created – that is, shifted – as a result of a government policy is a cost rather than a benefit for the economy as a whole, unless the policy improves resource allocation by, say, correcting for some sort of market inefficiency. (Whether or not government policies can be predicted systematically to improve the efficiency of resource use is the central focus of the vast public choice literature). As counterintuitive as that may seem, imagine that a federal policy had the effect of increasing the demand for high-quality steel. That clearly would be a benefit for steel producers, or more broadly, for owners of inputs in steel production, including steel workers. But for the economy as a whole, the need for additional high-quality steel in, say, an expanding wind-power sector would be an economic cost, as that steel (or the resources used to produce it) would not be available for use in other sectors. More generally, the creation of “green” jobs as a side effect of environmental (or carbon) policies is a benefit for the workers hired (or for those whose wages rise with increased market competition for their services). But for the economy as whole, that use of scarce labor is a cost because those workers no longer would be available for productive activity elsewhere.

There is the further matter that any expansion of the wind and solar electricity sectors must mean a decline in some other sector(s), with an attendant reduction in resource use there. After all, resources in the aggregate are finite. If there is substantial unemployment, and if the labor used in wind and solar activities is not highly specialized, a short-run increase in total employment might result. But in the long run – not necessarily over a long period of time – such policies favoring certain industries cannot create employment; they can only shift it among economic sectors. In the context of the Obama carbon policy, an expansion of wind and solar power would accompany a contraction of the coal-fired power sector, and a contraction of other sectors due to an overall increase in electricity prices. Moreover, there is also the adverse employment effect of the explicit or implicit taxes that must be imposed to finance the subsidies needed to increase wind and solar generating capacity; that such subsidies are likely to be required for the foreseeable future is a topic explored in detail in this AEI study.